Eighth Pick in the WMD Portfolio - Diageo

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The previous two portfolio picks, Spectra and Oxy, are both in the energy industry. There are still lots of bargains to be had in energy, that should pay off eventually. For my next pick I am going a little more simple than trying to predict what the Saudi do, how OPEC reacts, and when energy prices run back up; in the case of Diageo its a simple matter of brand and distribution excellence meets global consumer preferences for quality beverages. 

Despite an overall solid year for the stock market as a whole, Diageo shares have been left behind. The S&P 500 is up about 13% year to date as of now Diageo shares are down around 10%. That's a wide gap. But why? One reason is that Diageo relies on emerging markets for growth and that has slowed. Another is that China has been on a concerted effort to reduce corruption and high priced booze is an easy target. 

But Diageo has the brands and global scale to weather these events. Diageo owns number one and/or number brands in most categories for example:

• Vodka - Smirnoff, Ketel One
• Scotch - Johnnie Walker, Caol Ila, Talisker
• Gin - Tanqueray, Gordon's
• Rum - Captain Morgan
• Canadian Whisky - Crown Royal
• Tequila - Don Julio

This is just to give you a taste, they own a lot more besides the above. Plus Diageo owns Guinness which a National Geographic photographer friend who has been everywhere says is his first choice beverage because you can rely on it pretty much wherever you are in the world. Diageo does have a hole in its portfolio for bourbon and American whisky, but beyond that its a dominating player in the categories its in. When he invested in Harley-Davidson, Warren Buffett remarked that he liked buying into brands where the customers tattoo the name on their chest. Some Diageo brands have a similar following. I wonder how many people have Guinness tattoos?

Diageo's current yield is 2.98%. That's a yield 50% better than the market for a company that is not an average company. Diageo's five year average Return on Equity is 38.7%. 

The company does operate with some leverage, its Debt/Equity ratio is 1.1 which is higher than I normally like. However Diageo has excellent interest coverage ratio at 5.7. It can afford to pay off its debt. And its one of the few companies where acquisitions can make sense because they have the distribution network across the world to push brands through. The dividend is safe at a 54% payout ratio.

Diageo has grown its dividend at 7.5% annualized over the last five years. Still, the price is not cheap at a P/E of 20, but these kind of companies do not really go into the bargain basement.  The overall quality and yield make it a good combination to add to the WMD portfolio.

The Profit Gets to the Heart of What Matters in Business

For busy people there is not much time to sit around and watch TV. On the plus side, there is not much on TV that's worth watching! One happy exception is CNBC's "The Profit." The lessons that are packed into this one hour show combine to give you about half of the most important things that you may learn from an entire MBA program.

A lot gets written on "teaching kids to invest." Before you skip ahead to teaching your high schooler what P/E ratios are, remember that investing is buying into part of a business. For most people understanding businesses is an abstract concept at best. But learning how businesses function is very educational, not just for those specific businesses but indeed how much of the world functions.

The Profit focuses on businesses that are up against some kind of threat, perhaps liquidity or product or customer or legacy issue. The Profit aka Marcus Lemonis, goes to great pains to point out that he is not a consultant, but he clearly has learnt the old consulting rule of thumb - its never process problem, its never a tech problem, its always a people problem.

The shows give you a slice of life in a wide variety of businesses from Key Lime pie companies to auto sales to coffee roasting and a lot more. What the show excels at is quickly getting a clear picture as to the value (if any) that exists in the company, and then efficiently figuring out where the blockers are. The main lens is people, process, and product to slice and dice where the strengths and weaknesses are. But its the people that must be genuinely convinced to participate, both the business owners to do the deal and Marcus Lemonis that the deal is worth doing.

So much of business is taught (and practiced!) as a bloodless operation, I think that's a real turnoff, sure numbers matter, but unless the people side is working you won't get the numbers over the long haul. Real world business is incredibly personal. The show does a great job showing the human side, good and bad, of business.

As we're still in the middle of the uneven post 2008 recovery, its especially fraught with emotion and meaning as you watch business owners fight to save their creations and employees fight to save their jobs.

There are a lot of great lessons embedded in the show. Some that stand out:

• Find diamonds in your backyard - a recurring theme is employees going to heroic lengths to keep businesses rolling. This happens in a lot of small businesses (and all successful ones), what's missing often is that investment in people will pay off more than any other 
• Know when to say no and walk away - its easy to get swept up in the dealmania, only look at the upside, but some deals just do not make sense
• Be decisive - small businesses do not have layers and layers of bureaucracy, its all hands on deck. Whether its chucking old merchandise that won't sell or closing stores that don't make sense, tough calls have to be made and acted on efficiently
• Simplify then scale - a number of the businesses have solid cores but extended in too many directions at once. Marcus Lemonis leads the businesses through a process of simplicity first. There is a good episode on a South Carolina Barbecue restaurant with huge customer demand. Instead of adding another location, Marcus Lemonis has them get one location right and then plan to scale from there. Walk in to a Chipotle, the menu could not be much simpler. I recall interviews with Chipotle CEO/Founder Steve Ells when they became successful asking him what is next? Breakfast? Late night? Bigger menu? Ells replied 'we are not going to do any thing new. We are going to do what we already do and we are going to do it better.' In software development we say "one is more than none" don't overengineer out of the gate. That's a crucial business message that comes through in many The Profit episodes. 

There are other business shows on TV, but none that get to the heart and head of business. Shark Tank can be fun, but its too often a bloodless VC conversation and while its fun to see all the different business ideas, you do not get the day to day operations or any visibility into the people that make the business tick. Here again The Profit gets to the heart of what matters.

Seventh Pick in the WMD Portfolio - Occidental Petroleum

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The previous pick in the WMD Portfolio was Spectra Energy. I am taking further advantage of falling energy prices with Occidental Petroleum. I have no idea if this is the bottom and it probably isn't. For all I know oil prices could go much lower and stay low for years.

But we have to balance the positives. Oxy has simplified its business model. At the end of November Oxy spun off its California assets into a separate company (California Resources). Oxy also plans to sell off its Middle East/ North Africa assets. Those transactions will leave Oxy as a focused player in the Permian basin.

Since, I have no idea what oil prices will do, Balance Sheet safety is paramount. Levered players are already starting to get washed out. Oxy has a Debt/Equity ratio of 0.2 they can weather low prices.

During the financial crisis, Oxy continued to raise its dividend. In 2004, Oxy paid $0.55/share in dividends and today its $2.80/share. That is excellent dividend growth. The current yield is 3.5%.

Oxy is a very shareholder friendly company. They have steadily brought down the share count. Management plans a major buy back which could result in retiring almost 10% of its shares. Since Oxy is trading at its lowest P/E valuation since 2008 this should be an excellent time to shrink the share count.

All in all, even with the vast uncertainty around oil markets, Oxy's simpler business model, safe balance sheet, and shareholder friendly actions make it a good addition to the WMD portfolio. 

Investing in what lies clearly at hand

Today is Thomas Carlyle's birthday. Charlie Munger cites his philosophy and its influence on operations at Berkshire Hathaway.

From Charlie Munger's comments the Wesco 2004 annual meeting

"And there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.

It wasn’t just Berkshire Hathaway that had this attitude about master plans. The modern Johns Hopkins [hospital and medical school] was created by Sir William Osler. He built it following what Carlyle said: “Our main business is not to see what lies dimly in the distance but to do what lies clearly at hand.”

Look at the guy who took over the company that became IBM. At the time, it had three equal sized business: [a division that made] scales, like those a butcher uses; one that made time clocks (they bought this for a block of shares, making an obscure family very rich); and the Hollerith Machine Company, which became IBM. He didn’t know this would be the winner, but when it took off, he had the good sense to focus on it. It was enlightened opportunism, not some master plan.

I happen to think great cities develop the way IBM or Berkshire did. I think master plans do more harm than good. Anyway, we don’t allow them at Berkshire, so you don’t have to worry about them."

There are plenty of people who invest with the hope of finding the next big, disruptive thing. Or playing some big investment "theme." But there is more than one way to invest. The Carlyle/Munger approach.

As to themes, the top down mentality has its limits, it can work for certain people, but macro tends to be pretty unpredictable. Just in the last couple of years we have heard peak oil, the decline of the dollar, the decline of US economy, rise of the BRICs and numerous other plausible sounding grand theories offered by smart people, but none of these have really played out as predicted. I prefer a bottom up approach. It may not be as neat and orderly appearing as a top down approach where you allocate 10% to ten different industry sectors or countries or some such, but if each company in your portfolio has sustainable earnings power does it matter if there are 25% more consumer defensive stocks than energy? I do not think so.

The other dimension this brings to mind is a quote from Howard Marks "If we avoid the losers, the winners will take care of themselves." Notice the shift in mindset from how many investors work. Many investor look for the next Tesla, but that assumes you can predict a long list of things that will happen. It also assumes that you go in with a big enough purchase to make a real difference. If instead you assume that its not practical to guess the winner 10 years down the road and just focus on looking at dealing with the risks clearly at hand, you end up with a fundamentally different portfolio.

Sixth Pick in the WMD Portfolio - Spectra Energy

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

With all the churn in energy prices, prices reverting back to long term lows, there will be winners and losers. We are already starting to see losers shake out of the process. But what about winners? The big integrated companies like Exxon and Chevron are weathering the storm pretty well. I would like to add one of these type of companies to the WMD portfolio at some point, but at the same time the fact they are weathering the storm means the shares are not as cheap relative to the rest of energy. What about smaller E&P? These are pretty risky and while I am sure there are bargains, I am also sure I am not smart enough to know which ones are the right ones to pick.

But whether through ETFs or bots or other reasons, there does seem to be interesting knock on effects in many parts of the energy space. Pipeline operators are also getting blown away, but some of these have limited direct exposure to the price of oil or gas at any given time. One of these is Spectra Energy, which is mainly in natural gas, not oil.

Spectra's pipelines give it the ability to move natural gas across most of the eastern US and beyond.

Spectra's yield is at 3.7%, the company announced a 10.5% dividend increase for Q4. The company has a long list of projects in motion and a well covered distribution so it should be able to deliver double digit dividend growth for near to mid term. I am sure there are better bargain prices in energy than  Spectra. But Spectra's 3.7% yield offers a fair deal for quality income over the long haul.

You don't know who is drilling naked until the tide goes out

Given the grim near term outlook in energy, @PlanMaestro asked a prescient question a few weeks back:

This story has a personal angle for me, because some years ago I used to own Seadrill shares. I liked the overall business model which was the leader in off shore drill rigs. They were very shareholder friendly, paid a huge dividend around 7% at the time. It seemed the demand for oil rigs would go on and on. Problem is they borrowed from existing rigs future to fund the next rigs. Turtle stacking exercise that works until it doesn't.

The lesson to me is about process. I could not have predicted the level and pace of both increasing oil supply combined with the slackening of demand of this year. In fact, were I to bet a few years back,  I would have bet the other way on at least one of those. However, I avoid betting on future, macro events as much as possible. What I could do and luckily did, was just snap the chalkline against Seadrill's leverage and say - no matter how wonderful the dividend appears (remember not many 7% payers), no matter how much I think being a leading driller will matter, I just do not want to own a cyclical company with that much debt. Luckily I sold at a small profit. 

Today Seadrill suspended their dividend. That sent the shares down 17% for the day so far. The shares are down 50% for the year. Also the appeal was the dividend, and that is gone.

The big lesson here is quality matters - especially in dividend investing. You do not get the 10x kind of growth that growth investors may see in a Tesla.  If you are buying McCormick Spice and Unilever, its way more about mistake avoidance, grinding out great results over decades. 

Mistakes always hurt in investing, but for dividend investors they matter way more. For dividend investors it has to be don't lose first, because you do not have the 10 baggers to make up the difference for the flameouts. Growth investors can swing for the fences, whiff on 7 out of 10, and crush a couple out of the park and have a great overall result. Dividend investors have to look more like George Brett - hit .380, get on base, bang out some doubles. 

One thing I learned programming computers is that order of operations matters a lot. Its not just what you do, but in what order of execution. The motto of this blog is Safety, Dividends, Growth in that order. The dividend investing process has to set a bar that ensures the overall safety of the company before you consider the dividend and the growth, because otherwise its too easy to get swept away by an eye popping, yet illusory yield.

Fifth Pick in the WMD Portfolio - Tupperware

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

I first came across Tupperware as an investment idea some years ago, through the work of one of the finest investors I know - Jeff Fischer who runs Motley Fool's Pro service.

Tupperware has a lot to recommend it on the business side. The most famous characteristic is the parties themselves and how they illustrate the Liking principle that Robert Cialdini describes - "People are easily persuaded by other people that they like. Cialdini cites the marketing of Tupperware in what might now be called viral marketing. People were more likely to buy if they liked the person selling it to them."

There is a lot to like in how Tupperware is able to engage with its target market, from Cialdini's book Influence - "It’s gotten to the point now where I hate to be invited to Tupperware parties. I’ve got all the containers I need; and if I wanted any more, I could buy another brand cheaper in the store. But when a friend calls up, I feel like I have to go. And when I get there, I feel like I have to buy something. What can I do? It’s for my friends.”

Its hard to find anything resembling a good price, so why is Tupperware in a zone of reasonableness? One guess as to why Tupperware shares are priced well compared to the market overall is that investors conflate them with Herbalife which is undergoing lots of scrutiny as to its business model. However, Tupperware gets its income from the consumers at the parties. 

Tupperware 10-Q: "The vast majority of the Company's products are, in turn, sold to end customers who are not members of its sales force."

Tupperware is a truly global business, its focused on the emerging market consumer. The U.S. is less than 10% of its business, and its sees India and Indonesia as its top markets going forward. Tupperware levels the playing field for women in emerging economies. The business model enables women all over the world to create profitable businesses.

The regional sales breakdown is as follows:

• AsiaPAC 32%
• Europe 28%
• North America 25%
• South America 15%

Tupperware sees itself as an AND company as in Developed Markets AND Emerging Markets. Still the latter plays the biggest role going forward - Argentina, China, Indonesia, Brazil, and Turkey grew over 20% last twelve months.

With so much to like about the business model, what about the goals of the Wide Moat Dividend portfolio - Safety, Dividends, and Growth?

The first red flag is the Debt/Equity level which sits at 2.4, that normally would be enough to stop the analysis. However, looking to Todd Wenning's single most important metric Free Cash Flow cover shows that Tupperware's Free Cash Flow provides ample coverage.

Tupperware has the Free Cash Flow to pay its dividend, and with an Interest Coverage ratio of 7.5 it also has the ability to handle its debt load.

Tupperware's current yield is 4.0%. It has a five year annualized dividend growth rate of 23%. Tupperware buys back its shares, and has reduced its overall share outstanding from 64m in 2010 to 51m outstanding today.

Tupperware puts up very strong ROE and ROIC metrics year after year.

The overall combined effect shows a good opportunity for quality income. Tupperware's 4% yield is substantially better than average and above even what many Utilities pay today. But Utilities have pretty limited growth, whereas Tupperware more than doubled its revenue in the last decade.

Tupperware's current valuation also looks relatively attractive. Its P/E is 15.4 versus a five year average of 16.6. Its Price/Cash Flow is 12 versus five year average 13.4. Add it all up you get quality, income, and a fair price for an excellent business.

Last year, Tupperware "logged 24 million Tupperware parties worldwide in 2013, up incrementally from 22 million in 2012, 21 million in 2011, and 18 million in 2010." The company has a motivated, global sales force, treats its shareholders well, and room to grow.I plan to buy the shares, and keep them sealed up for a long time.

High Yield Reads - 10/5/14

Summary of recent stories of interest, sometimes enduring, to investors.

• Morgan Housel's "Not Your Father's Dividend Stocks" talks about the churn in dividend stocks that's left unexpected stocks like tech stocks among the most interesting dividend payers. Of course, that is no surprise to the users of Todd Wenning's Dividend Compass. The article cites analysis from Patrick O'Shaughnessy on Bell Canada, Telstra, and Total as good foreign candidates for dividend payers. I think these three are all interesting, but the article does not mention the tax implications of Canadian, Aussie and French dividends. All else equal its worth considering foreign payers from countries where there is not an additional dividend tax. Vodafone, BP, and Royal Dutch Shell (B class) are good examples of companies in the same industries in countries which do not have an additional withholding for US investors. Here I should note that I am not a tax professional, so do consult yours. More information courtesy Josh Peters, Morningstar here. What matters in the end isn't headline yield or even value, what matters is total return after taxes and fees to the investor.

• A Wealth of Common Sense "Fat Tails and Hyperinflationary Fears" - hedging sounds good in theory, but too much cancels out benefits. "You have to take some risk to make money in markets."

• Base Hit Investor "Importance of ROIC Part 4: The Math of Compounding" - great example of the quality of a top notch business being able to overcome even pretty rich valuations. Also liked that he gives dividends their due in Example B where a company generates 20% ROIC but can only invest about half of it whereas the rest of its paid in dividends. I think for many businesses this is the case, and that as a practical matter, having to pay the dividend forces management to be choosy about any cash they reinvest.

• Shale revolution - Five years ago Nigeria was the fifth largest oil exporter to the US, today they export no oil to the US. 

• Tim McAleenan tries to figure out what stock Buffett is buying and lands on Exxon Mobil. "Buffett thought it made sense to purchase long-term shares of ExxonMobil last year at a price of $90.85...Right now, after this most recent slide oil stocks especially, Exxon has come down to the $92, $93, $94 range. Even rounding up, comparing $90.85 to $94 is only a 3.46% increase. Heck, Exxon’s repurchased that much stock alone in the past year, leading me to believe that Buffett sees an intrinsic value increase for the year of at least 3.46%, and is using this opportunity to add some more stock."

• Speaking of Berkshire, I originally thought the deal for Van Tuyl automotive as a nice little add on purchase, generate a few billion here and there.  But then in thinking more about it, it looks pretty strategic, because it helps address one of Berkshire's unique "problems" - too much cash. When you generate as much cash as Berkshire does its hard to find places to put it to work at scale, this explains BNSF and utilities. In the case of Van Tuyl there are at least two ways to put the zero cost float to work. 1) Consumer credit for auto loans and 2) rolling up fragmented auto dealers under the Berkshire automotive brand. 

Cocktail napkin math on 5 plus 5 dividend yield and growth

One of the main metrics I use is the simple 5+5 rule that I first came across in Daniel Peris' excellent book Strategic Dividend Investor. The 5 + 5 rule looks for a combination of dividend yield and dividend growth. So the total should equal 10 percentage points, for example 5 percentage points of current dividend yield plus 5 percentage points of annual dividend growth.

Putting this into practice is about a rough separation for high yield and low dividend growth versus lower yielders with high dividend growth. . A company with a 3% dividend yield would need at least 7% dividend growth to clear the bar. Likewise a high yielding company with say 6% would only need a tepid 4% growth to get over the 5+5 hurdle.

GlaxoSmithKline's 5.6% current yield combined with a 6.6% 5 year annualized dividend growth clears the 5+5 hurdle with a total of 12.2. By the same token, IBM clears the hurdle even though it has a much lower yield of 2.3%, IBM sports a 5 year dividend growth rate of 14.3% for a combined 16.6 percentage points.

Before any mathematicians jab a pencil into their eye, the 5 + 5 rule is not about mathematical precision. Its much more about orienting your frame of reference for investment selection and ongoing portfolio management - what am i looking for with this investment? What does "good enough" look like? What are the minimum expected growth rates that are acceptable given the current yield? Is a low yielder with decent growth as good an investments as a high yielder?

I did some cocktail napkin math with four scenarios

• 2% current yield with 8% growth
• 3% current yield with 7% growth
• 4% current yield with 6% growth
• 5% current yield with 5% growth

First cut is income only and 5% current yield wins here, more than double the income at the end of the decade (though not double on cost)

Yield Plus Growth	2+8	3+7	4+6	5+5
Income - Year 1	2	3	4	5
Year 2	2.16	3.21	4.24	5.25
Year 3	2.33	3.43	4.49	5.51
Year 4	2.52	3.68	4.76	5.79
Year 5	2.72	3.93	5.05	6.08
Year 6	2.94	4.21	5.35	6.38
Year 7	3.17	4.50	5.67	6.70
Year 8	3.43	4.82	6.01	7.04
Year 9	3.70	5.15	6.38	7.39
Year 10	4.00	5.52	6.76	7.76
Total	28.97	41.45	52.72	62.89

For Capital appreciation I tracked the growth of $100 and assumed that the shares roughly track the dividend growth and so the 2% yield wins here

	2+8	3+7	4+6	5+5
Capital - Year 1	100	100	100	100
Year 2	108.00	107.00	106.00	105.00
Year 3	116.64	114.49	112.36	110.25
Year 4	125.97	122.50	119.10	115.76
Year 5	136.05	131.08	126.25	121.55
Year 6	146.93	140.26	133.82	127.63
Year 7	158.69	150.07	141.85	134.01
Year 8	171.38	160.58	150.36	140.71
Year 9	185.09	171.82	159.38	147.75
Year 10	199.90	183.85	168.95	155.13
Total	1,448.66	1,381.64	1,318.08	1,257.79

Then in the last scenario I combine the income plus capital plus reinvest the dividends each year.

	2+8	3+7	4+6	5+5
Total W Div Reinvested	100	100	100	100
Year 2	110.16	110.21	110.24	110.25
Year 3	121.31	121.36	121.35	121.28
Year 4	133.53	133.53	133.39	133.13
Year 5	146.93	146.81	146.45	145.86
Year 6	161.63	161.29	160.59	159.54
Year 7	177.73	177.09	175.90	174.21
Year 8	195.38	194.30	192.46	189.96
Year 9	214.71	213.06	210.39	206.84
Year 10	235.88	233.48	229.77	224.94
Total	1,597.25	1,591.13	1,580.54	1,566.01

The ten year total returns are for all intents and purposes identical. I think this shows the value of 5 + 5 as a conceptual model. Of course, its a model not reality, but despite it breaking any number mathematical rules it holds up well as a rough guide.

There are a  number of caveats here, first there is no guarantee that share price will track dividend growth, although it usually does over a long enough time scale.  One of my starting points is 5 years annualized dividend growth, but just because IBM and GSK have grown their dividends in line with the 5 + 5 rule for the last five years, the future can be different. Just ask Tesco or Boardwalk Pipeline shareholders.

I still find it interesting to see that in a total return view the 5+5 thinking works pretty well and it confirms to me that both low yielders like IBM and high yielders like GSK can be worthwhile long term holdings when dividends are reinvested.

Bill Gates, Dividend Investor

WSJ Story on Michael Larson who manages investments for Bill Gates mentions the variety of different assets in the portfolio. This includes real estate, hotels, and a lot of stocks, too.

The stock portfolio is interesting to study, as you might imagine its pretty defensive. Berkshire Hathaway is 46% of the portfolio. Clearly follows rule 1 - don't lose money.

There are a number of idiosyncratic ideas in the portfolio like Liberty Global, Grupo Televisa, and Crown Castle.  These things all sound interesting but overall majority of these kind of things just goes into the "too hard" pile for me.

Luckily though, a clear theme emerges in something I can get traction on - over a third of the stock portfolio is high quality dividend growth stocks.

Here is my calculation of dividend income from the top dividend payers in the portfolio.

	Shares	Div	Income	Yield
Coca Cola (KO)	34,002,000	1.22	41,482,440.00	3.10%
Caterpillar (CAT)	11,260,857	2.8	31,530,399.60	2.8
McDonald's (MCD)	10,872,500	3.24	35,226,900.00	3.4
Wal-Mart (WMT)	11,603,000	1.92	22,277,760.00	2.6
Waste Mgmt (WM)	18,633,672	1.5	27,950,508.00	3.4
Exxon Mobil (XOM)	8,143,858	2.76	22,477,048.08	2.8
Republic Services (RSG)	1,350,000	1.12	1,512,000.00	3
Arcos Dorados (ARCO)	3,060,500	0.24	734,520.00	3.8
Coca Cola FEMSA (KOF)	6,214,719	1.11	6,898,338.09	1.1
BP (BP)	7,315,267	2.34	17,117,724.78	4.7
			$207,207,638.55

The portfolio construction has a couple of patterns. There are blue chip stalwart, dividend champion types - Coca Cola, McDonald's, Wal-Mart, and Exxon Mobil.  The kind of stocks where you buy right and sit tight.

Then there is trash - Waste Management and Republic Services. I really appreciate the static nature of these businesses. Waste Management owns I believe around half the of the landfills in the US, so even if they lose a hauling contract their competition has to pay them to use the landfill. Though I like the model, I could not get the math to add up on the safety of their dividend to get comfortable with WM. Republic Services looked more interesting some years back but the price has really run up.

There is a minor theme in the portfolio - US brands in Latin America. Coca Cola FEMSA is the largest Coke bottler outside the US and distributes products across Mexico and most of Latin America. Arcos Dorados (currently at/near 52 multi year low with a single digit forward P/E and near 4% yield) is the McDonald's franchisee for all of Latin America with over 2,000 McDonald's in 20 countries. These two standout as separate from the blue chip dividend approach and offer a potentially viable way to invest and earn income in Latin America.

Like Charlie Munger says its often profitable to learn from great investors.  With a track record like Michael Larson's where "Mr. Gates's net worth has swelled to about $82 billion from $5 billion since he hired the former bond-fund manager and gave him autonomy to buy and sell investments as he sees fit." its for sure that 16x growth with low risk is worth learning from. My takeaways from the stock portion of the portfolio are - 

1) Play defense first - 45% in Berkshire Hathaway helps anyone sleep well at night.

2) Generate quality income - boring is beautiful, the dividend championesque list above comprises over 33% of the portfolio and continues to deliver dividend growth

3) Be opportunistic - investments like Canadian National Railway and Liberty Global have paid off big time with each up over 200% since purchase

Reverse engineering those rules sounds just like the philosophy here- Safety, Dividends, Growth - in that order.

High Yield Reads - 9/14/14

Summary of recent stories of interest, sometimes enduring, to investors.

• Jason Zweig - Fireside Chat with Charlie Munger.  "Knowing what you don’t know is more useful than being brilliant."

• A Wealth of Common Sense - "The Best and Worst Things About Investing in Emerging Markets", the growth is there for all to see, but when it comes to picking winners in stocks that is not so easily done "China had by far the highest economic growth rate but also had one of the worst performing stock markets. Mexico, Brazil and South Africa all showed excellent stock returns with only decent economic growth. Other counties, including Turkey and Taiwan, actually showed economic and market performance that were in line with one another

• Morgan Housel doubts there have been 48,000 "perfect storms" in the last month. Bernstein's shallow risk is an annoyance not deep risk.

• Microsoft buying Minecraft and Co. Count me as a believer. Continue to be impressed with Nadella. If you go way back to the 80s, Apple's strategy had at its core a focus on kids and school computing. What are smart, creative kids doing today? A lot are crafting. So in a week that saw Apple introduce a device with three shopworn features presented as innovation, Microsoft gains direct access to waves of the next generations to hit computing platforms for decades to come. 

• John Huber on how to be the best plumber in Bemidji. "The good news is that the stock market is filled with opportunities (10,000 opportunities in the US alone), and most people—if they have the will and the work ethic—can carve out an advantage in some small corner of the market not unlike the one that the best plumbing contractor in that small Minnesota town has." 

Book Review - Education of a Value Investor

We live in a categorized, check box kind of world, so Guy Spier's "Education of a Value Investor" is bound to be sitting on a shelf in the Business/Investment category at Barnes & Noble right next to the numerous How To investing guides. But this is not a How To book, its a personal journey of discovery and value investing as conducted by Buffett, Munger, and Pabrai is a North star on this journey.

I received the book today and read it in one go, I suspect others will have a similar experience; find a quiet place and a comfortable chair - Guy Spier's story, told warts and all, pulls you in. Its hard to imagine rooting for a  self admitted Gordon Gekko type, but when he eventually starts to get it and figure out the bigger picture, and helps the reader learn from his own travails its easy to get behind Guy Spier's journey.

The book plainly isn't about the mechanics of investing, there are lots of books that covers these. The main theme is much more fundamental - make sure you spend as much of your time as possible with high quality people. One of my mentors in my own career advised you should always take at least one job in your career simply because of the people you would work with at that company. Guy Spier has sort of adopted this and expanded so its not about one job but a core operating philosophy. He cites a numerous second and third order powerful obliquities that arose out of this mode of operating.

There is another unexpected theme along this journey - gratitude. One of the most compelling parts of the book to me is the description of Guy Spier's devotion to the small, thoughtful kindness of writing thank you notes. To many people. This has the effect of both touching other people and ensuring that you are accounting for what you have received. These are important lessons not to lose sight of in today's world.

Friendships, people, gratitude - there are large parts of the book that are more like a self improvement book, and Guy Spier points to Tony Robbins' and others influences. Lots of people have benefitted from their work to improve their own productivity, health and personally develop, but Guy Spier shows exactly how this plays out in financial markets and in investor psychology which is a unique contribution, especially due to his transparent writing. Its a brave effort to put his mistakes on display and to share the journey at this level.

Value investing is almost like its own character in the book, and in the beginning of his career, Spier is as far from that concept as you could be, but by the end he has fully embraced and internalized the concepts.

Practically speaking there are number of good lessons, too. Spier's discussion of moving his practice from New York to Zurich goes into some detail about his thought process on designing the new space. There is a hard separation between the computer, Bloomberg busy room and a quiet library for reading with no computers. It struck me that Kahneman might call them System 1 room and System 2 room.

Spier stresses the importance of checklists and shares the key insight that checklists are not to tell you what to do, checklists are critical as a mistake avoidance tool. He includes a helpful way to think about processing investment ideas - do your own research first and then read news and other things about companies. Don't be led in by news or analyst reports because your susceptible to seeing things through their lens.

The overall theme is personal growth and connecting on a deeper level with great people (living and dead(through books)) they will help you discover vital things you can't on your own. The personal theme is to be true to yourself, do your research first, or as I say - outsource execution if you want, but never outsource strategy. Guy Spier writes that the "path to true success is through authenticity"and on this measure the book is a Peter Lynch ten bagger.

The real gem is the insight that value investing principles can go well beyond making money in the stock market; Guy Spier shows how value investing principles can be applied to enrich your personal life.

High Yield Reads - 9/6/14

Dominion on value of Moats

Summary of recent stories of interest, sometimes enduring, to investors. Note, everyone appears to have got a good vacation, there must be something to taking time off that refreshes you because the first three are as good as any I have read all year:

• My favorite piece from this week is Sanjay Bakshi's lecture notes where takes a walk through the deep woods of second and third order effects of Gary Klein and Daniel Kahneman. There is no simple way to reconcile the two, Klein is focused on gaining insight and Kahneman on mistake avoidance, but lessons from Sherlock Holmes shed some insight. 

• Howard Marks Risk Revisited covers a tremendous amount of cognitive terrain, not possible to summarize, just read it, but one nugget I really enjoyed was Marks' inverting Elroy Dimson's "risk means more things can happen than will  happen" to "even though many things can happen only one will."  

• John Kay - The Wisest Choices Depend on Instinct and Careful Analysis - "We will never succeed in evaluating works of art, choosing candidates, managing risk, without the skills that can be acquired only through experience; but that experience can always be enhanced by the power of data analysis and the implementation of scientific techniques."

• Todd Wenning documents lessons learned from Tesco's whopper of a dividend cut. Engineers know that you can learn more from failure than success and that makes it important to do a readout when things don't go your way. Yours truly owes Todd a debt of gratitude because running his Dividend Compass on Tesco a couple of times over the years convinced me to steer clear, even though I was intrigued. The dividend is the big enemy for income investors, you lose income and the shares get whacked. As Todd reminds us, no dividend is risk-less, investors should leave the party when the numbers don't make sense. He advises investors to have selling rules, so much is written about how to buy, but selling can be just as important a decision. Emotions are a chief enemy of investment success. If anything, emotions play a bigger role when selling because you become attached and anchored to your years as an owner. Better to have a checklist to buy and a checklist to sell. 

• Millenial Investor - Beware experts Bearing Predictions - avoid investment decisions based on subjective predictions. he quotes Jiddu Krishnamurti "The primary cause of disorder in ourselves is the seeking of reality promised by another"

• Wide Moat Dividend Portfolio holding Raven Industries raised its dividend by 8%. Raven has a 28 year long dividend streak.

• Dividend Mantra - Think Like an Owner - this is an important, oft-repeated concept. This post shows its tie in with dividend investing, namely - if you're an owner expect a paycheck.

• Related to above: Peter Lynch in 1994 on Knowing What You Own, and why its better to make 10x your money in Dunkin' Donuts than swinging for the fences on something you know nothing about.

High Yield Reads - 9/1/14

Summary of recent stories of interest, sometimes enduring, to investors:

• A Wealth of Common Sense - Charlie Munger's Investing Principles. My two favorites - “If you can get good at destroying your own wrong ideas, that is a great gift.” and "I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading." 

• Who says Google doesn't pay a dividend? WMD portfolio company (and dividend champion) Raven Industries, manufactures the balloons used in Google's Project Loon. Erika Morphy summarizes the project's expansion goals for 2014.

• Todd Wenning - Playing the Loser's Game. Its hard for individual investors to beat the pros in the short run, instead focus on avoiding mistakes.

• Morningstar - dividends play a critical role in long run returns

• Morgan Housel - Finance is a Strange Industry. 
• "I can't think of an industry that is so important to everyone yet so few care about. I get why people don't like calculus, or chemistry, or geography. They can do fine in life without mastering those subjects. Finance is different. Everyone's well-being depends on understanding it, no matter how boring you think it is. Everyone has a moral obligation to themselves and their family to have a basic understanding of how saving, investing, debt, and interest work. When people say, "I don't like finance," they're really saying, "I don't like security, stability, comfort, or taking care of my family. And my kids probably don't need college." There are few other subjects -- health might be the exception -- in which people have an obligation to understand something, yet so many willingly choose not to."

• It was somewhat surprising to see Neil Woodford buy into HSBC bank, but even though it was a relatively large position, he has sold out of it already over concerns of fines.

Fourth Pick in the WMD Portfolio - Raven Industries

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The current portfolio consists of Coca Cola, GlaxoSmithKline and IBM. Stalwarts all. Raven is a bit different than the rest, for one thing its a small cap with a $987M market cap, but its earned its place all the same. Raven has three main divisions: Applied Technology, Engineered Films & Aerostar Division and they serve industrial, agriculture and defense customers.

On the quantitative side, Raven has a low yield (1.8%) relative to the S&P, though that is a little bit more attractive if you compare Raven's yield of the Russell 2000 index which yields 1.3%.  Raven has some positives, for starters Raven is a Dividend Champion. They've paid dividends 27 consecutive years. On top of that,  Raven has committed to growing their dividend, they have a ten year annualized dividend growth rate of 15.5%.

Does Raven have a moat? Todd Wenning covered Raven in his informative investigative series on Small Cap moats:

"This business has two potential moat sources. One is switching costs; once a farmer has installed a Raven precision ag system across a fleet of equipment and learned how to use the programs, there's an added cost of switching to a competitor's offering. The second source is network effects; a reputable, well-established company with a wide breadth of support, service, and training has an edge over any newcomer."

Small cap moats are different from the behemoth moats like IBM in mainframes, Glaxo in vaccines and Coca Cola, but there is a case to be made that Raven, through advanced manufacturing skill and long term focus, has carved a profitable niche for itself. The numbers bear this out

	RAVN
Debt/Equity	0
Payout ratio	44%
Fwd Dividend Yield	1.8%
10 yr Div Growth	15.5%
ROE 5 yr avg	26%
Forward P/E	18

(Source: Morningstar)

Raven is a manufacturer with a great track record and yet has no debt, this provides a margin of safety. If Raven can continue to come close to its long run ROE and dividend growth averages this should be a good investment over the 5-10 year timeframe. The shares are not super cheap but the company is very innovative (even providing tech (balloons) to Google for Project Loon). Its a shareholder friendly company and at today's prices, Raven is right about at its 52 week low.  Put it all together and it looks like a fair price for a high quality company with a years of dividend growth ahead of it.

High Yield Reads - 8/18/14

Summary of recent stories of interest, sometimes enduring, to investors:

The Wide Moat Dividend portfolio (model portfolio)  is designed to produce income and total returns, not drama. But there has been fair amount of the latter. There are only three stocks in there currently - Coke, IBM and GlaxoSmithKline, but they've managed to generate some interesting news

• Coke paid $2.15 Billion for 16.7% of Monster, this does not appear to be that high a price. The most interesting story was a discussion of why Coke didn't just buy all of Monster. Coke wants to keep an arm's length from Monster's edgier brands.

• Stephen Lamacraft of Woodford  Funds provided a useful way to look at GSK's reengineering:

GlaxoSmithKline is currently a very unpopular stock – as contrarian investors, this is one of the reasons we like it, because its unpopularity is reflected in a very low valuation. To put this into context, Bayer recently acquired Merck’s consumer healthcare business for 7x sales. If you were to put Glaxo’s consumer healthcare business (it recently put its consumer healthcare assets into a joint venture with Novartis) on the same multiple, it would be broadly equivalent to half of Glaxo’s market capitalisation. 

By combining the potential valuation of the consumer healthcare division with the potential valuation of a world-class vaccines business and VIIV, a leader in HIV treatment, you get the current market value. As such you get a portfolio of existing pharmaceutical products and a strong pipeline of new drugs, in our view – for free! It’s worth mentioning that this division is no minnow with a potential valuation of £33bn, some 50% of the current market cap. 

Now, we are not suggesting that a corporate bidder is going to pay that sort of money for Glaxo’s consumer healthcare business any time soon – it’s just an interesting way of looking at the valuation opportunity that exists in the stock currently. The recent earnings disappointment has fuelled the market’s desire to focus on the short-term but, in doing so, it is ignoring a very interesting long-term story. Indeed, we are increasingly positive on that long-term investment case.

• Continuing on the "significant amount of bad news already reflected in today's price", Barron's thinks the worst may be over at IBM.

• Morgan Housel - an Honest Stock Market Update. 

• Interview with Lou Ann Lofton on how Warren Buffett Invests Like a Girl. "With Buffett, he doesn’t care what Wall Street’s doing. He’s not going to be suckered into that. He buys what he knows, for the long-term, and manages risk as best he can. All of these things will help people make money—that’s what it’s all about."

• Vitaliy Katsenelson shares his Robin Williams story and a great clip from Moscow on the Hudson.

• Tim McAleenan - The Twenty Stock, Twenty Year Investment Plan

IBM Will Survive and Thrive

IBM is the third stock I added to the Wide Moat Dividend portfolio. Its a company with substantial positives - a 2.4% yield with plenty of room to grow. IBM has a payout ratio of 25% and a five year dividend growth rate of 14.3%. The Return on Equity averages 75% over five years. And the price is right IBM's trailing P/E is 12.

In a market with next to no bargains, why is IBM on sale? The company gets lumped in with the other "old" tech - Cisco, Microsoft, Oracle, et al.  aka the IT shop of the 90s-2000s. No one wants to own the next Blackberry tech company that fades away. No doubt they all these players have their challenges with Cloud, Mobile, BYOD and on and on. But I think IBM is unique and in the best position of any of them to survive and thrive. Unlike Blackberry there is no one silver bullet that can take down IBM's franchise. Still the old tech sectors is on sale

	P/E	Yield
IBM	12	2.4%
Cisco	17	3%
Microsoft	17	2.6%
Oracle	17	1.2%

(Source: Morningstar)

None of the old tech players are richly valued on conventional metrics. Investors are right to be concerned with how they each navigate the shifting sands of Cloud and Mobile. Cloud and Mobile present real challenges to each but in different ways. In some ways Microsoft is the most exposed here since they have both client and server side franchises. At the same time Microsoft is executing and moving aggressively to defend its turf, with Azure the Pepsi to Amazon/AWS' Coke in the Cloud space. Microsoft has yet to enjoy the same level of success in Mobile.

Cisco in theory is less exposed than Microsoft because Cloud and Mobile drive up demand in networking gear which they sell. However, the knock on effect of Cloud and Mobile is buyer concentration, where the large Cloud providers increasingly build their own systems soup to nuts and do not rely as much on companies like Cisco. Inside the enterprise, the data centers move to the Cloud which eliminates more sales potential from Cisco. On the Mobile side, sure the bandwidth utilization keeps going up, but then Cisco has to deal with entrenched, large scale players with more bargaining power. Oracle is a bit aimless, without many clear wins to point to, however, they are so deep in the backend that many of the new developments will take longer to reach their base. Mobile is a client side technology and Oracle has never had anything cooking there to begin with. Still the shrinking IT shop is a headwind for Oracle's growth.

That brings us to IBM. For a start, IBM is a totally different animal from the above players, for one thing they have a massive services business a la Accenture that the other players do not have. Steve Ballmer joked about why he avoided services saying if you are in the pharma business why would you want to go into the hospital business? Fair enough, and the services margins will never equal a hit software franchsie, but as Accenture proves when services are done well the result can be profitable and evergreen.  In IBM's case their estimated services backlog at December 31 was $143 billion. That should see them through a rough patch or two. This is a lower (but not low) margin business than software but way steadier and will help them ride through the vissicitudes of technology churn.

As to Cloud, IBM's core customers are among the least likely to headlong into the Cloud, think banks and other transaction oriented businesses.The Cloud is not going to deliver the control and security that these customers need. There is an old tech saying, if a Unix server goes down you have a bad day, if a mainframe goes down the world stops spinning on its axis.

“Planes don’t fly, trains don’t run, banks don’t operate without much of what IBM does,” Ms. Rometty said.

The shortage of growth at IBM is partly by design — and has been for years. Since 2000, the company has sold off businesses that collectively generated $16 billion in sales, including personal computers and disk drives. Since Ms. Rometty became chief executive in 2012, units with $2 billion in revenue have been shed, and when the sale to Lenovo is completed this year, she will have divested operations with revenue of $6 billion.

Profit trumps growth at IBM. “We don’t want empty calories,” Ms. Rometty said. “So when people keep pushing us for growth, that is not the No. 1 priority on my list.”

IBM’s largest single investment in growth is in helping companies exploit the digital data deluge from corporate databases, sensors, smartphones, the web, social networks and elsewhere. That push into the field now called big data began years ago, and Ms. Rometty played a central role in shaping the strategy before she became chief executive.

IBM's core customers have its technology woven into the fabric of their businesses. In many cases, they have been optimizing and extending the code since the 1970s. This is not going to be replaced by the Cloud.  and if anything will look to build their own private clouds with IBM's help and/or use . Then you have the Snowden effect, Ginni Rometty at Mobile World Congress:

"Enterprises will want—and need—to manage their data in the cloud with the same rigor as if it were on-premises. Companies will want to ensure visibility, auditability, security. This will be also be driven by regulation. Roughly 100 nations and territories have adopted data protection laws. In Europe, many countries require that citizens’ data be housed within national borders. This is why IBM is aggressively expanding its global cloud footprint. We currently have 25 data centers globally, and the new $1.2 billion investment announced in January will see the opening of 15 more, in the US, the UK, Australia, Japan, India, Canada, Mexico and China."

Ginni Rometty's speech was the first time an IBM CEO spoke at Mobile World Congress, and that portended a very interesting development in mobile.  IBM  did not have much going in mobile until recently, the Apple-IBM deal that Ginni Rometty and Tim Cook (an ex-IBMer) put together is still early days but could be a very big win.

Apple has the devices and the mobile platform, but you need servers and mainframes to do something interesting, Apple does not play there, has never played there and IBM has them in spades. Security is a core concern and IBM is a major player there as well. Its a deal right out of Ricardo. Its early days, Apple-IBM could be the Wintel of the Mobile world. If nothing else, the deal shows creativity on IBM's part to go from a bystander to being in the center of the ring in Mobile.

For sure, IBM has any number of challenges, I think the old guard of tech will see one or two of the current players not make the leap into this new world, its just the way of the tech world. I agree that as a group old tech players can fairly be discounted from the market P/E, but in IBM's case its overdone.
 I think IBM has a better shot than any of the old guard at getting the next waves right and they have several ways to win - Cloud, data center, services, and mobile partnership with Apple. IBM should not only weather the storm, they have ways to thrive in Cloud and Mobile and continue to innovate.

On top of that an IBM investor gets as shareholder friendly a business as there is, IBM's repurchases and dividend policies are top notch.

IBM Dividend data by YCharts

IBM is in a solid place on fundamental metrics. It does compete in highly contested spaces, but its unique mix of franchises and R&D (repurchases and dividends) give investors a decent chance of earning solid total returns over the long term.

GlaxoSmithKline - Stout Yield Worth the Risks?

GlaxoSmithKline is the second stock that I added to the Wide Moat Dividend (WMD) portfolio. The positives are pretty clear - a 5.6% yield really stands out in this yield parched world. All the better when it comes from a defensive company like Glaxo and sells for a discount to the market, Glaxo's trailing P/E is 14. With a decent price and a five year average ROE at 58%, this is a stock that Joel Greenblatt would love, and in facts its one of his holdings.

Still as Joel Greenblatt is the first to point out, you do not make it through his magic formula screen when everything is rosy. There has to be a lot of hair on any company that can those generate those ROEs and still sell so cheaply - Glaxo faces a number of near and mid term challenges.

As great as the yield, P/E and ROE metrics are, there are troubling numbers, too. Glaxo's payout ratio is 81% and its Debt/Equity is 2.4. There is not a lot of room to maneuver here if things go poorly. However there are some factors that balance out some of the negative.

The stock price was hit when Glaxo recently lowered guidance and stopped buybacks. However, for the purposes of the WMD portfolio I care more about the dividend than buybacks. On dividends, the the focus of Glaxo management shines through, they raised the dividend 6%.

I use a simple 5+5 metric for the WMD portfolio, the yield plus dividend growth should exceed ten percentage points. With a 5.6% yield plus a 6.6% five year annualized dividend growth rate, Glaxo earns a 12.2. Things are not perfect at Glaxo, but prioritizing dividends over buybacks is a good tradeoff here in my view.

The list of challenges facing Glaxo is not short, however that is what gets you a price like we see today. There are not guarantees, but management's priorities appear to be in order, favoring shareholders. Despite its current standing as sector whipping boy, Neil Woodford views Glaxo's troubles as temporary, has Glaxo as his fund's second largest holding, around 7% of the fund. Woodford's comments could be construed as talking his book until you realize that he has purchased his Glaxo shares in the last two months.

There is a lot to do for Glaxo to be successful, like any pharma company they have to continue to roll out successful platforms, in Glaxo's case its respiratory. The company is adding less glamorous areas like vaccines and consumer health (which will soon represent more than half Glaxo's income). One analyst derided them as "The market is changing around them, and there's a sense Glaxo is the granddad stuck in the corner." I have no problem with boring, actually that sounds favorable to me.

Its not a no brainer investment, despite the gaudy price, yield and quality metrics. While Glaxo's risks are real, at a 5.6% yield, investors have a chance to earn a stout income as the process unfolds.

Second & Third Picks in WMD Portfolio - GlaxoSmithKline & IBM

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The first pick was Coca Cola, today I am "adding" two other great dividend payers - GlaxoSmithKline and IBM.

Its very hard to find a 5+% dividend yield today from a high quality operation, but that's what GlaxoSmithKline offers. The current yield is 5.5% albeit with moderate growth (6.6% five year annualized dividend growth).

IBM's forward dividend yield is 2.4%, that is not super high but still well above the overall market. Since their payout ratio is 25%, it can grow comfortably for many years. IBM management is willing to raise the dividend with five year annualized dividend growth at 14.3%. Its as high quality a company as there are anywhere in the world. The 5 year average ROE is 75% all for a very good price, the trailing P/E is 12. About the only negative on IBM's metrics is that debt has risen to do buybacks, but at this price point is surely makes sense and the company can cover its payments.

	GSK	IBM
Debt/Equity	2.4	2.0
Payout ratio	81%	25%
Fwd Dividend Yield	5.6%	2.4%
5 yr Div Growth	6.6%	14.3%
ROE 5 yr avg	58%	75%
Trailing P/E	14	12

(Source: Morningstar)

These companies are not perfect, both have higher debt loads than you would like. Glaxo's payout ratio is a bit too high. However, they both should have no problem meeting their debt obligations. One metric for selection I use is a 5+5 metric - dividend yield plus dividend growth should be 10 or higher. Both GSK (12.2) and IBM (16.7) clear this hurdle with room to spare. The quantitative side looks excellent; however there are qualitative reasons why Glaxo and IBM are priced cheaply and I will explore these in future posts.